FCA considering new online test to vet suitability for higher-risk investments

by Jonathan Adams
FCA

Online advertising sucking retail investors into high-risk investment products not suitable for them is not a new phenomenon. But a recent spate of scandals and surge in such offers over the past couple of years is prompting the Financial Conduct Authority (FCA) to look at new ways to protect investors from risking their life savings on the promise of attractive returns that often fail to materialise and instead incur losses.

One of the options being considered to protect investors from products they don’t understand is an online test to vet for suitability. Before being allowed to take a risk on certain categories of investment by putting their money on the line retail investors would have to first demonstrate they appreciate the nature of the product and level of risk involved.

The FCA’s Sheldon Mills, director of consumers and competition at the regulator, recently commented:

“We are concerned that too often consumers are investing in high-risk investments they don’t understand and can lead to significant and unexpected losses. We continue to address harm in this market through our supervisory and enforcement action, but recognise more needs to be done.”

The regulator has faced heavy criticism itself in the wake of scandals like the collapse of minibond firm London Capital and Finance (LC&F)that saw investors lose over £200 million. Tacit acknowledgement that the government’s regulator failed to do enough to protect the savers who invested in LC&F’s minibond offers led to the recent announcement of an additional tax-payer funded compensation scheme.

The FCA’s remit can often see its hands tied when it comes to outlawing high-risk products because they don’t fall into regulated categories. But it does intend to crack down on how high-risk investment categories are marketed.

Standard investment products like mainstream funds, investment-grade bonds and listed equities can be marketed to anyone by regulated companies who follow the rules on how they are represented. Riskier categories of financial investments like unlisted shares in private companies such as those bought via crowdfunding platforms or the government-backed EIS and SEIS schemes are subject to some restrictions. And most unregulated investment products should not be mass-marketed at all.

While the FCA cannot ban many high-risk investments because they are not regulated to fall outwith its remit, it can strictly enforce how they are marketed and pursue companies who break the rules. The watchdog will also review which types of investments should be subject to tighter restrictions and could include new categories of products it considers to be “speculative” in nature.



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